Rising rents and declining vacancies made the county’s apartment sales market vigorous last year, two real estate brokerages report.
There’s likely to be even better news for apartment owners in the coming months as a dynamic local economy creates many new jobs, one observer predicted.
In 1999, the local apartment market saw 18,042 units change hands. That’s a 19 percent increase over 1998 and the highest sales activity since 1990, said George Carlson, a vice president at Burnham Real Estate Services of San Diego.
“We attribute the strong 1999 sales performance to the rising values of existing apartment properties that is being propelled in large part by a limited supply of rental units and rising rents,” Carlson said. “This is evidenced by a countywide apartment vacancy rate of less than 2 percent and rents that have increased steadily over the past four years.”
A recently released report by the national firm Marcus & Millichap Real Estate Investment Brokerage Co. mirrors many of the statistics reported by Burnham. The Marcus & Millichap report predicts a 2 percent increase this year in local employment, most of which will be well-paying, high-tech jobs.
Although demand for apartments is increasing, acquisition and development costs are expected to keep construction starts near 3,200 units, the Marcus & Millichap report said. Apartment starts in 1999 totaled 4,500 units.
“The decrease is due largely to increasing land costs, a lack of available developable land and an aversion to multifamily projects by many planning departments and city councils,” said Kent Williams, regional manager for Marcus & Millichap.
Buyers Plentiful
For Dick Bassett, senior investment associate with Hendricks & Partners of San Diego, the present market is one characterized by a great deal of buyers looking to buy apartments. His firm specializes in residential income real estate sales.
“There’s one heck of a lot of people thinking about buying apartments and trying desperately to do that,” Bassett said. “But if you want to look at where we are in the real estate cycle, we’re getting up to the point where some investors are saying ‘How far up can we go?'”
Bassett sees the best purchasing opportunities right now for buyers in C-grade properties. Those are units built in the 1970s and early 1980s without a lot of amenities in areas such as El Cajon, Vista, San Marcos and Escondido. Those apartment buildings offer the potential for rent increases after remodeling and adding amenities, he said.
Rising mortgage interest rates have curbed sales prices in the past few months, he added.
“I think there’s definitely a softening of the feeding frenzy we’ve experienced in the past because the higher interest rates reduce the cash flow from the properties,” he said.
The declining vacancy rate and rising rents have made it more difficult for agents to find sellers willing to sell at a reasonable price, he added.
“It’s tough trying to get listings because the owners finally are enjoying rising rents, much nicer cash flows and virtually everyone who has owned their property for five to 10 years has major capital gains tax problems if they sell.”
He said those selling their apartments and planning to move up to a bigger complex and planning to save money though a tax-deferred exchange, should look for properties that have delayed maintenance and have the opportunity to add value through capital improvements.
That way they can increase rents easily when the work is finished, he said.
Mark J. Riedy, a professor of real estate finance at the University of San Diego, sees the long-term upward trend in rents and apartment prices as continuing for the foreseeable future.
“It’s part of the function of San Diego’s dynamic economy, which continues to roll along nicely,” Riedy said. “The population growth within San Diego County by babies being born, as well as migration here for employment, is also contributing to the shortage.”
He sees a partial solution to the housing crunch in the county through higher density zoning in existing urban areas located near transportation nodes like trolley and bus stations.
Riedy also pointed to development fees, charged up-front by local governments instead of being financed through bonds and special district assessments attached to the specific property and paid over time, as contributing to more expensive housing.
“Up-front fees delay the development process and eliminate affordable housing.” Riedy said.
